It has been called one of the greatest wealth-building strategies ever devised. Section 1031 of the Internal Revenue Service Code allows investment property owners to sell real property, reinvest the proceeds in “like-kind” exchange property, and defer capital gains tax.
What is a 1031 Exchange?
The IRS has allowed tax-deferred exchanges for over one hundred years. While subtle changes to this section have bee made over time, the core benefit of tax-deferral has remained intact with enduring support from both sides of the political aisle. The tax strategy officially got its name from IRS code Section 1031, created in1954. As defined in the code:
No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of “like-kind”, which is to be held either for productive use in a trade or business or for investment.
The like-kind property definition is much broader than many investors realize. For example, you could sell a multifamily property and exchange it for raw land, a retail center, an office building, or a self-storage facility. The ability to exchange for other types of investment property can allow you to diversify your portfolio with other assets and potentially enjoy greater property appreciation.
Exchange After Exchange
It is also important to know there is no limit to the number of times you can use a 1031 Exchange, which enables you to roll over gains from one investment property into another over ears or even decades. So as investment property appreciates, you can put the entire proceeds to work from a property sale, again and again with multiple exchanges.
Interested in learning more about deferring capital gains taxes with a 1031 Exchange? download our comprehensive guide, Tax-Deferred Strategies for Real Estate.